The Rate-Puzzle Is Coming Together

The macro premise remains simple and I’ve written about this a lot: The US is drowning in debt and as long as rates are low it’s all fun and giggles, but there is a point where it cramps on growth and the simple question is when and where. In recent weeks we have had a nasty correction coinciding with technical overbought readings and both bonds and stocks testing 30 year old trend lines.

In the meantime we continue to get data that keeps sending the same message: It’s a debt bonanza that keeps expanding and is unsustainable. Janet Yellen a few months ago said the debt to GDP ratio keeps her awake at night. Yesterday the Director of National Intelligence came out and described the national debt on an unsustainable path and a national security threat. This is literally where we are as a nation.

What is there to say but stand in awe at the utter hubris that is being wrought.

Last night the Fed came out with the latest household debt figures and it’s equally as damning, record debt and ever more required to keep consumer spending afloat:

The non-mortgage piece is particularly disturbing:

A few nuggets in the Fed’s household debt data.
Total non mortgage debt was $2.7 trillion at the peak in 2008.
Now it’s over $3.8 trillion, a 41% increase.
The big drivers: Auto loans and student loans.
Also: Credit card balances back at their 2008 peak. pic.twitter.com/HYA1XI6rbq

“Non-housing balances, which have been increasing steadily for nearly six years overall, saw a $58 billion increase in the fourth quarter. Auto loans grew by $8 billion and credit card balances increased by $26 billion, while student loans saw a $21 billion increase”.

“As of December 31, 4.7 percent of outstanding debt was in some stage of delinquency. Of the $619 billion of debt that is delinquent, $406 billion is seriously delinquent (at least 90 days late or “severely derogatory”).

“The flow into 90+ days delinquency for credit card balances has been increasing notably from the last year and the flow into 90+ days delinquency for auto loan balances has been slowly increasing since 2012”.

So they want to keep raising rates. Fine go ahead. See what happens.

Fact is the 10 year has broken out of its cup and handle pattern:

The pattern incidentally targets 3.5% and that is way above Gundlach’s panic moment for stocks.

This morning we saw an initial panic reaction in stocks that was promptly bought. It’s OPEX and $VX roll-over and the chart structures had already informed us that there may be an interesting technical buy zone in the 2630 area as was posted by Mella the day before:

And this is exactly what we saw in pre-market today, a quick dip into 2628 and pow, a blast higher. Whether this speculative inverse plays out remains to be seen. The key however was that the chart gave a tradable edge on the quick move down.

But don’t mistake short term technical responses with the ultimate outcome of all this.

Higher interest rates will ultimately trigger the next recession as the entire debt construct will be weighted down by the burdens of cost of carry. And today’s inflation and correlated weakening retail sales data suggested that there’s price sensitivity already at these, historically speaking, still very low rates:

The Fed may find itself horribly behind the curve and this will have consequences.